My last Southwest Farm Press stated the wheat market had $1.25 upside potential compared to a $0.50 downside risk. Since the article was written, the Kansas City Board of Trade (KCBT) July wheat contract price has increased $0.85 from $5.70 to $6.55. The forward contract basis for harvest delivered wheat increased about $0.20 for a total price increase of $1.05.

Higher prices change the risk situation. Rather than $0.50 downside price risk, there is now $1.50 downside price risk.

The variability of price movement is related to time. Between now and May 31, 2010, there is the potential for $4.60 KCBT wheat contract prices ($4 cash in central Oklahoma and the Texas Panhandle) or KCBT wheat contract prices could also reach $8 ($7.25 cash).

Today’s economic situation makes it difficult to determine the reason for price changes and the potential price range. Even through the USDA crop production and use estimates for the 2009-2010 marketing year were in line with trade estimates, wheat price increased. Except for delayed spring wheat plantings, the wheat supply and demand expectations have changed very little.

Market factors that may have impacted wheat prices: delayed corn plantings, declining value of the U.S. dollar versus other major currencies, oil price increases, and hedge and index fund purchases of commodity contracts. These same factors may have also resulted in higher corn and soybean prices.

Some analysts indicate that lower corn production and stocks and relatively high world wheat production will result in increased wheat feeding. The USDA’s 2009-2010 world wheat supply and demand estimates supports reduced stocks due to feeding wheat.

World wheat production for the 2009-2010 wheat marketing year is projected to be 24.2 billion bushels. The world’s five-year average, including last year’s record 25.1 billion bushels, is 23 billion bushels.

World 2009-2010 wheat ending stocks are projected to increase to 6.7 billion bushels. Before the 2008-2009 marketing-year 25.1 billion bushel record world wheat crop, world wheat ending stocks were 4.4 billion bushels. The 25.1 billion bushel crop resulted in a 1.7 billion bushels increase.

2009-2010 marketing year production is projected to be 900 million bushels less than in 2008-2009. Yet, ending stocks are projected to only increase 600 million bushels. The reduced increase in world wheat ending stock could be related to an increase wheat feeding.

The massive increase in world wheat ending stocks (4.4 billion to 6.7 billion bushels – the average is 5.3 billion bushels) lowers the odds of higher wheat prices. I am concerned about high U.S. and world wheat stocks and the potential negative price impact.

The “joker in the deck” is fund activity in the commodity markets. Some economists say that a hedge against inflation is to own commodities. There has been increased fund buying in the commodity markets. One analyst said that wheat prices would be $1 lower if it were not for the funds. (In my opinion, this is good for producers.)

When supply increases, prices decline. Some economists are expecting this to happen with prices in the U.S. As the money supply increases as the government prints money to pay for the stimulus program, the dollar looses value and buys less (inflation).

Fund buying commodities to hedge against inflation could result in higher wheat prices. The risk is “who will buy when funds start selling?”

Right now the odds are that wheat prices will peak in late June or early July and then decline into the fall and winter. Lower production could change this outlook.

Consider selling one-half at harvest, one-fourth in late September and the final one-fourth in November.